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Pork Central Hog Market Thoughts for December 15 2005

by 5m Editor
19 December 2005, at 12:00am

By Allen Prosch, Pork Central Coordinator, University of Nebraska - Feed costs are at historical lows. March 2006 corn futures closed at $2.01 on December 8, 2005. More importantly, when this contract closed below $2.10, interest and volume in the contract increased rapidly.

There is opportunity to hedge future feed costs at very favorable levels. Using the current futures markets in corn and soybean meal, adjusted for Nebraska basis, producers could establish breakevens in the $37.00-$39.00 range.


Current lean hog futures contracts, adjusted for a $2.00 average basis, would provide producers profits near $25.00 per head for 2006 production. The risk is two fold. In a recent Daily Livestock Report, Meyers and Steiner discussed the sow and gilt slaughter numbers and suggested some expansion may be taking place. Second, while feed for 2006 is plentiful and cheap what lies ahead? The Palmer Drought Severity Index for 2005 and 1988 may give some insight. You will recall that 1988 was characterized by severe drought. Also, important to note is that the corn growing areas of eastern Nebraska, Iowa, Illinois and Indiana are affected in 2005 but not to the levels of 1988. Plus, areas farther east and north were greatly affected in 1988.

This may suggest less to worry about, but any additional increases in drought will have greater impact because we are using, and planning to use, a great deal more corn. Think ethanol!! And, increased livestock feeding and all the other demand increases we’ve created. We use more corn than ever so smaller crops may have bigger impact. Producers who control feed costs and hedge hog sales in 2006 should have another profitable year. Futures prices are well above breakeven hog prices for most contracts in 2006. Corn and soybean meal futures prices also offer opportunities to lock in feed cost well into 2006 as well.


That combination offers a valuable risk management opportunity. To finish, here are some additional thoughts on the North American breeding herd. It is possible we have modest expansion. North American pork production currently does not use available shackle space. There are a number of plants running single shift that could be double shifted. Expanding the hog supply or processing capacity is not the issue. Being able market the total volume of pork produced at a price that will allow all the segments of the industry to prosper is the issue.

The futures market has not reacted negatively to the news that more beef will be exported. But, continuing to export pork at current levels or higher is important. Both hog producers and processors have benefited from the huge export increases of 2004 and 2005. The restraint pork producers have shown in keeping live hog supplies in line with live hog demand has helped them profit for some time, and if they use good risk management strategies, will allow profit through most if not all of 2006.

Continuing the restraint on expansion they have shown may be the next best “risk management” plan. We’ll be back after the 1st of the year and will have the December Hog and Pigs Report to review. It will likely give a better insight into hog supplies for 2006.

Source: University of Nebraska's Pork Central - November 2005